Can Hershey Still Offer Tasty Returns?

With shares of Hershey (NYSE:HSY) trading at around $73.40, is HSY an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Writing about Hershey is enjoyable because it’s a feel-good story. This is a company that always looks out for the people in its community, is good to its employees, and is now helping children in Ghana. Hershey is also a creative company. For instance, if you would like information about baking, or if you would like to talk about baking with others, then you can go to @HersheysKisses on Twitter between 9 a.m. and 12 p.m. or between 3 p.m. and 6 p.m. during the holiday season.

All of this might make people feel warm and fuzzy inside, but investors want to know if the stock will move higher. While that’s impossible for anyone to predict with 100 percent accuracy, we can look at some factors that give us good indications on which way the stock is likely to move in the future.

Before we get started, it’s important to note that Hershey has a 2.30 percent yield. Therefore, you will always have some money coming in when you own the stock. In regards to the business, Hershey has a double digit profit margin, over $900 million in operating cash flow, and they are now focusing on expanding international growth in China and Mexico. In regards to the profit margin, it has increased five years in a row.

Everything is looking up so far, but do the most important numbers tell the same story? Let’s take a look.

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Hershey is high. Some people might say that you can do a lot worse than 1.92, but this is far from a comforting number. It’s also much weaker than competitors, Mondelez International (NASDAQ:MDLZ) and Tootsie Roll Industries (NYSE:TR). The balance sheet for Hershey is also negative, but very manageable.

Debt-To-Equity

Cash

Long-Term Debt

HSY

1.92

$466.23 Million

$1.99 Billion

MDLZ

.80

$3.87 Billion

$29.51 Billion

TR

0.00

$51.69 Million

$0

T = Technicals on the Stock Chart Are Strong

Hershey has performed very well over the past three years, far surpassing the performance of its competitors.

1 Month

Year-To-Date

1 Year

3 Year

HSY

4.79%

21.39%

26.47%

119.70%

MDLZ

.50%

-31.00%

-29.80%

.81%

TR

5.71%

17.77%

14.64%

9.95%

At 73.31, Hershey is currently trading close to all its averages.

50-Day SMA

73.28

100-Day SMA

73.36

200-Day SMA

73.43

E = Earnings and Revenue Are Strong

Annual revenue and earnings have been consistent.

2007

2008

2009

2010

2011

Revenue ($)in billions

4.95

5.13

5.30

5.67

6.08

Diluted EPS ($)

.93

1.36

1.90

2.21

2.74

Quarterly earnings and revenue have also been consistent. However, there was a decrease in earnings in Q3 YoY.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

1.62

1.57

1.73

1.41

1.75

Diluted EPS ($)

.86

.62

.87

.59

.77

T = Trends Support the Industry

When you think of Hershey products, you likely don’t think of a company that will grow in a down economy. Hershey has managed to stay afloat domestically over the past few years. Their goal is to maintain their competitive edge in the United States and Canada while gaining exposure in China and Mexico. Who knows what the goal will be after that, but since Hershey doesn’t yet have a lot of international exposure, there is plenty of room for growth.

Conclusion

Most of the information above is positive. Perhaps the biggest positive is that Hershey continues to increase profit margins on an annual basis. Barring any unforeseen circumstances, this trend should continue. The only potential negative here is that Hershey has a Trailing P/E of 25.72 and a Forward P/E of 20.48. But if you’re looking to invest for the long haul, that shouldn’t be a concern.

Based on steadily increasing profit margins, growing revenues, increased international exposure, past stock performance, and a yield of 2.30 percent, Hershey is an OUTPERFORM.